WestJet Moves Toward New Unit for $2 Billion Regional Market

By Frederic Tomesco -
Feb 8, 2012

WestJet Airlines Ltd. (WJA) moved closer to
starting a low-cost regional unit next year as a majority of
employees backed the idea after management sought their input.

The creation of a short-haul carrier that may start as
early as 2013 was supported by 91 percent of employees, Calgary-based WestJet said today in a statement. The airline also posted
fourth-quarter profit that topped analysts’ estimates, and
shares rose to the highest price in more than four months.

Adding a regional unit would let WestJet tap a C$2 billion
($2 billion) market for short-haul Canadian and trans-border
flights, Chief Financial Officer Vito Culmone said last month.
The unit would fly about 40 turboprop planes to airports with
runways too small for the airline’s Boeing Co. 737 jets.

“Strategically it’s a good move,” Chris Murray, a
transportation analyst at PI Financial Corp. in Toronto, said
today in a telephone interview. “The 737 is just too large to
operate into certain cities in Canada, so if you want to pick up
additional traffic, you are going to have to move into the
regional space.”

Adding the unit will improve profitability and help WestJet
achieve its target return of 12 percent from invested capital,
Chief Executive Officer Gregg Saretsky said on a call with
analysts and investors today. The airline now plans to seek
aircraft bids from Bombardier Inc. (BBD/B) and from Avions de Transport
Regional, or ATR, the turboprop-plane venture of European
Aeronautic, Defence & Space Co. and Finmeccanica SpA.

Regional Aircraft

While both Bombardier’s Q400 and ATR’s 72-600 are
“excellent” aircraft, WestJet plans to limit its regional
fleet to just one type of plane, Saretsky said on the call. The
airline may place its order by midyear and is “optimistic”
about starting operations before the end of 2013, he said.

The proposed unit would probably have operating bases in
Calgary and Toronto, Saretsky said last week. It would allow
WestJet to offer direct service between cities such as Regina,
Saskatchewan, and Winnipeg, Manitoba, and boost service to New
York City to attract business travelers.

WestJet’s turboprop order may be worth C$800 million to C$1
billion, PI Financial’s Murray said. He said Bombardier will
probably win the contract because WestJet executives such as
Saretsky are more familiar with the Montreal-based company’s
planes. WestJet’s CEO previously worked at Alaska Air Group
Inc., which operates a fleet of Bombardier turboprops.

Bombardier’s Q400 is probably better suited to WestJet’s
needs because it is faster than ATR’s 72-600, Murray said.

‘Aggressive’ Bidding

Still, “I would expect ATR to be very aggressive in their
bidding on the program,” he said.

WestJet plans to add seven nonstop flights every business
day between Toronto and New York’s LaGuardia airport starting
June 4 on its Boeing 737 airliners.

The carrier, which controls an estimated 36 percent of the
Canadian regional air travel market, said separately today that
fourth-quarter profit dropped 4.3 percent amid higher fuel
costs.

Net income was C$35.6 million, or 26 cents a share,
compared with C$37.2 million, or 26 cents, a year earlier, the
airline said. Revenue climbed 13 percent to C$781.5 million. The
average earnings estimate in a Bloomberg survey of analysts was
20 cents.

Fuel Costs

The average fuel cost in the quarter increased 26 percent
to 92 cents per liter, excluding hedging, WestJet said.

Fuel is WestJet’s largest expense, representing about one-third of total operating costs for the year, the company said.
That’s up from 28 percent in 2010.

For the first quarter of 2012, WestJet said it expects fuel
costs, excluding hedging, of 93 cents to 95 cents a liter. That
would be an increase of as much as 12 percent from last year’s
first quarter.

Capital expenditures this year will probably rise to C$165
million to C$175 million, including aircraft payments and engine
overhauls, from last year’s C$118.4 million, WestJet said today.
The figure doesn’t take into account any spending linked to the
short-haul unit, Culmone said today on the conference call.

WestJet today boosted its quarterly dividend by 1 cent to 6
cents a share, payable March 30 to investors holding stock as of
March 14. WestJet said it may buy back as much as 5 percent of
outstanding shares within the next year.